Food Bowl Or Folly? the Economics of Irrigating Northern Australia

DEPARTMENT OF ECONOMICS ISSN 1441-5429 DISCUSSION PAPER 02/15 Food Bowl or Folly? The economics of irrigating Northern Australia Jared Dent* and Michael B. Ward† Abstract Australia’s northern area has vast but largely undeveloped land that would be arable if irrigated. The prospect of a northern ‘food bowl’ has drawn political support for irrigation schemes from both major parties in the 2013 federal election. In this study we consider the net economic benefits of allocating northern Australia’s divertible surface water to irrigation, a scheme that would require significant infrastructure costs in dam and canal construction. We estimate the benefits to northern Australia, using a Ricardian hedonic approach to forecast the economic value of constructing major new irrigation schemes that would be capitalised into agricultural land values. We use publicly available information from existing and potential Australian irrigation schemes to define the cost of constructing large water storages and distribution infrastructure, as well as on-farm irrigation infrastructure. We find that the costs of turning northern Australia into an irrigated food bowl are likely to exceed any benefits that would be capitalised into land prices by a multiple of between 1.1 and 3.2. JEQ Classifications: Q15, R11 Keywords: irrigation, dams, agriculture, land value, benefit cost analysis * Crawford School of Public Policy, Australian National University † Economics Department, Monash Business School, Monash University © 2014 Jared Dent and Michael B. Ward All rights reserved. No part of this paper may be reproduced in any form, or stored in a retrieval system, without the prior written permission of the authors. ABN 12 377 614 012 CRICOS Provider No. 00008C Introduction Over the past five years, Australian state and federal governments have spent in excess of $500 1 million of public funding to support the expansion of the existing Ord River irrigation area in north-western Australia. Hatched in the 1940s, the Ord River irrigation scheme has a history of repeated and consistent failure, despite massive public subsidies that, in current dollar terms, total well over $1 billion. This is not atypical of irrigation ventures in the north (see, for example, the ill-fated Cambellin irrigation scheme (Yuhun, 1989)). Nevertheless, during the 2013 Australian federal election campaign, both major parties recommitted to ‘opening up’ northern Australia to intensive agricultural development. In response to this, this study considers the following question: If we continue in the future to make additional large public investments in broad scale irrigation infrastructure in northern Australia, are the economic benefits likely to outweigh the costs? To address this question, we use the most up to date publicly available information to define the cost of building vast new surface water storage dams and the hundreds of kilometres of distribution infrastructure required to move water through the landscape. On the benefits side, we undertake a Ricardian analysis, an application of hedonic price theory, to estimate the value of existing irrigated land under the assumption that past expenditure on irrigation infrastructure is fully capitalised into agricultural land values. Assuming that pricing practices do not change radically in the future such that they actually cover the full opportunity cost of public investment in irrigation infrastructure, 1 All $ figures refer to 2013 Australian dollars unless otherwise noted. 1 this measure provides an indicative value of the future benefits that will be capitalised into land values if construction of major new water storage and distribution infrastructure goes ahead. We model the value of irrigated agriculture using a quasi-likelihood generalised estimating equation method. To maximize predictive performance of our econometric model we use a general-to-specific model selection framework based on Pan’s (2001) quasi-likelihood information criteria. We subsequently use our model estimates to produce a heat map of the potential market value of irrigated land for all of northern Australia. We find that, even in the most optimistic scenario, the costs of constructing surface water irrigation schemes in northern Australia will exceed any benefits capitalised into land values. We project that the average value of irrigated land in northern Australia will be approximately $6,200 per hectare while the costs of developing that land will be upwards of $26,500 per hectare. Issues that are not considered in this analysis, but which would need to be considered in a full cost benefit analysis, include: environmental regulations, of which there are many; native title issues; the impact on down stream industries, such as fisheries and tourism; and the practicalities and timing of converting a potentially large swathe of northern Australia over to irrigated farmland. This paper proceeds as follows. First, we provide some background and economic context about the recent push to develop agriculture in northern Australia, including a discussion of the practicalities, the physical environment, and the outcomes from previous attempts to water the north. We then move on to discuss recent studies looking 2 at the availability of land and water in northern Australia, and provide a summary of the likely costs involved in large scale development of irrigated land, including the cost of building water storages. Next we turn to the potential benefits, and describe our data, economic model and econometric estimation strategy. We then present our empirical results, including projected land values for irrigated agricultural land in northern Australia. We conclude with a discussion about the value of potential dam sites in northern Australia. Background A policy to develop the north of Australia is not new. It has been touted repeatedly by Australian politicians going back at least 100 years to Australia’s second Prime Minister, Alfred Deakin.2 So it was no surprise that, during the 2013 Federal election campaign, the Coalition of the Liberal and National parties committed to exploring ways to develop the economy of northern Australia. One proposal was to develop an agricultural ‘food bowl’ that would double Australia’s agricultural output by 2030 (Mitchell, 2013). A similar commitment, albeit restricted to the Northern Territory,3 was also made by the then Labor Government during the same election campaign (Coorey, 2013; Wright, 2013). At least at first glance, it is clear why such proposals have been attractive. 2 In his victory speech in 1906, Deakin spoke of his ambition to “people the unpeopled shores…connecting them with the south and ourselves with…trunk lines which will bind us together as one great whole” (Deakin, 1906). 3 The Northern Territory is a self-governed Territory of the Commonwealth of Australia. The term ‘northern Australia’ is a geographical area that encompasses approximately 120 million hectares that spans parts of the Northern Territory and the states of Western Australia and Queensland. 3 Figure 1 - Northern Australia (Panel A) - Geographic context (Panel B) Source: Google Maps EngineLITE With reference to Figure 1, northern Australia is strategically located in the Asia-Pacific. If the north of Australia were developed into an agricultural food bowl, it would be strategically placed to access markets within the huge and growing economies of Southeast Asia as well as the world’s second and third largest economies, China and Japan respectively (World Bank, 2014). The Asia-Pacific is home to a rapidly growing middle class (Barton, Chen & Jin, 2013) and in the midst of food safety concerns in the region, China in particular (Lubman, 2011; McDonald, 2012), demand for Australia’s high quality produce is likely to drive export earnings into the future (Port Jackson Partners, 2012; Austrade, 2012). Darwin, Australia’s northern most capital city, lies just four hours flight time from the Indonesian capital, Jakarta; a little less than six hours flight time from Hong Kong; and is home to a natural deep water port. 4 In addition to its strategic location, northern Australia hosts a large natural resource base. Of its total 120 million hectares between six and 17 million hectares is arable land4 – which World Bank (2013b) figures indicate constitutes between 11 and 38 per cent of Australia’s current total arable land resource. Northern Australia also has vast water resources. Every year approximately one million Gigalitres (GL) of rain falls over northern Australia, generating approximately 200,000GL of surface water runoff (Cresswell et al, 2009). This represents approximately one third of Australia’s total average rainfall and more than half of Australia’s total average runoff (Bureau of Meteorology (BoM), 2013; Kollmorgen et al, 2007; Brouwer et al, 1985). In 2011-12, Australia irrigated 2.14 million hectares of land with 8,170GL of water. This implies an average application rate of approximately 3.8 Megalitres (ML) or 0.0038GL per hectare (Australian Bureau of Statistics (ABS), 2013b). At this application rate, northern Australia would need between 22,800GL and 64,600GL of water per annum – which represents between approximately 11 and 32 per cent of its total annual runoff – to irrigate its entire stock of arable land. The potential value of this irrigated land is significant. Meyer (2005) suggests irrigated agriculture produces somewhere between 30 and 50 per cent of total agricultural profits in Australia on less than one per cent of total

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